Fed Minutes Shows FOMC Is Hawkish

The Fed released its Minutes from the meeting from March 20th to the 21st. I consider it to be slightly hawkish because all the FOMC members stated they expected the economy to strengthen and inflation to rise in the coming months. The stock market had a moderate sell-off in response to this release. The S&P 500 was down slightly when it was released and closed down 0.55% on the day. The negative day was blamed on Trump’s combative tweet towards Russia. It’s tough to assign blame on a day where the Russell 2000 was up 0.22%. It looks worse than it is because the Dow was down 0.9% as Boeing sold off 2.2%. If the combative threat was really thought of as something that could provoke a war, you’d expect Boeing stock to be up as it’s in the aerospace and defense cohort. It’s possible the market was slightly reversing the major gains from Tuesday which may have come too fast.

The Fed expressed worries about the potential trade war with China saying there is downside risk to the economy because of it. The Fed’s updated reaction would be interesting to hear since so much has happened since March 21st. I don’t think the tariff battle will cause any change to monetary policy unless there are further actions. I think cyclical weakness has a better chance of causing the Fed to hike rates fewer times than expected.

Fed About To End Accommodation Period

One of the big changes discussed in the Minutes was whether the Fed should change the language of its policy from accommodative to neutral or restraining. This is interesting because it will affect how the market reads policy guidance. However, I think the Fed is already neutral on policy. The Fed funds rate is 1.69% and the core PCE was up 1.6% year over year. To me, that is neutral policy even though the Fed funds rate is much lower than previous cycles. You also need to take into account the QE tightening policy path. As you can see from the list below, the Fed is ramping up its unwind from $20 billion per month to $30 billion per month in April. It will get to its peak of $50 billion per month in Q4. Including QET, the Fed is at a neutral policy and will shift to restraining the economy sometime in the next 12 months. If the Fed hikes rates 4 times this year, it will hit restraining in 2018.